Covidien Management Discusses Q3 2012 Results - Earnings Call Transcript

Covidien (COV)

Q3 2012 Earnings Call

July 26, 2012 8:30 am ET

Executives

Coleman N. Lannum - Vice President of Investor Relations

Jose E. Almeida - Chairman of the Board, Chief Executive Officer and President

Charles J. Dockendorff - Chief Financial Officer and Executive Vice President

Analysts

David H. Roman - Goldman Sachs Group Inc., Research Division

David R. Lewis - Morgan Stanley, Research Division

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

Thomas J. Gunderson - Piper Jaffray Companies, Research Division

Joanne K. Wuensch - BMO Capital Markets U.S.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Matthew Taylor - Barclays Capital, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Anthony Petrone - Jefferies & Company, Inc., Research Division

Jonathan J. Palmer - Credit Agricole Securities (USA) Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2012 Covidien plc Earnings Conference Call. My name is Clinton, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now, I'd like to turn the call over to Cole Lannum, Vice President of Investor Relations. Please proceed, sir.

Coleman N. Lannum

Thanks, Clinton, and good morning, everyone. With me today are Joe Almeida, Covidien's Chairman, President and CEO; and Chuck Dockendorff, our Chief Financial Officer.

We will be making some very brief introductory comments and then spend most of the time this morning, as usual, answering your questions.

The press release, with details of our third quarter results, was issued earlier this morning and is available on our website and on the newswires.

During today's call, we'll make some forward-looking statements, and it's possible that actual results could differ materially from our current expectations. Please note that under the Safe Harbor rules, we are under no obligation to update these forward-looking statements even if actual results or our future expectations change materially. We ask that you please refer to the cautionary statements contained in our SEC filings for a more detailed explanation of the inherent limitations of such forward-looking statements.

We'll also discuss some non-GAAP financial measures with respect to our performance today. A reconciliation of non-GAAP to GAAP measures can be found in our press release and its related financial tables as well as in the Investor Relations section of our website covidien.com.

For the third quarter, we reported GAAP diluted earnings per share of $0.93. And after adjusting for certain specified items, our non-GAAP earnings came in at $1.07 per share.

Now, I'll turn it over to Joe who'll go into more detail on the third quarter results. Joe?

Jose E. Almeida

Thanks, Cole. We delivered a very solid performance in the third quarter. Sales were on plan, up 6% operationally and 3% as reported. Our recent acquisitions contributed about 1 point of revenue growth in the quarter. We again registered year-over-year improvement in adjusted gross and operating margins.

In the Medical Devices segment, we had an outstanding quarter with 8% operational growth led by Energy and Vascular products. In the Pharmaceuticals business, we again registered very good performance for Specialty Pharmaceuticals paced by PENNSAID and EXALGO. And in Supplies, sales were somewhat above a year ago.

Before I go into more detail on our third quarter results, I'd like to spend a moment discussing the overall health care products marketplace. In the U.S., we have not seen any significant change in volumes, procedures or utilization in the last few months. Volumes remained depressed, largely due to continued high levels of unemployment and delays in elective procedures.

In Europe, austerity programs and the economic slowdown continue to pressure all of med tech.

Emerging markets are growing rapidly and we expect this to continue as access to health care expense, and the demographic trends are favorable.

Our results this quarter showed the positive impact of our broad portfolio and global leverage. In the U.S., sales grew 6%, driven by very strong 9% increase in the -- for Medical Devices. In Japan, we delivered double-digit growth with good gains in Energy, Vascular and Stapling products. We also reached solid products in other developed markets including Canada and Australia. In our emerging markets comprising Eastern Europe, Middle East and Africa, Asia and Latin America, sales again grew at a double-digit pace with broad-based gains led by Endomechanical, Soft Tissue Repair and Energy products. We registered exceptional growth in the BRIC countries, led by China and Brazil, where we will continue to make incremental investments to accelerate growth and expand our product offerings.

This positive progress was partially offset by somewhat slower growth in our European business, which was up in the low single digits operationally this quarter. Across the business, we saw a significant slowdown in Spain, the sales grew in many other markets despite the difficult conditions. We believe we have the right mix of products and technologies to be successful in the European marketplace.

As now I get into my comments on individual product categories, I would discuss our growth on an operational basis excluding the negative impact of foreign currency. I'm doing this because I believe they provide of a better picture of our progress.

In our large Endomechanical business, stapling products continued to perform very well with a double-digit increase led by the innovative Tri-Staple reloads. We experienced a strong demand for Tri-Staple as we continue to grow above the market and gain incremental share in stapling.

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